Overheard outside the Aviva building just now, one broker chatting to another about his plans for the England v Slovenia match this afternoon: “Yeah, I’m just gonna leave my jacket on the back of the chair and duck out.“

I expect a lot of that today.

Good luck, England.

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There is an excellent guest post on the Oil Drum with an easily accessible (to the layman) explanation of what went on and what is going on.

It’s good on the nature of the ‘leak’ and presents this pretty graphic image of the ferocity of the escape:

Factoid: If you assume that there is over 5,000 psi of downhole pressure at the BOP–and everything I have heard indicates it is probably substantially higher than that–then a 1/4 inch diameter hole is large enough to “leak” 5,000 barrels a day. That “leak” would probably cut off your arm if you passed it in front of itB

He adds that the fact that there is almost certainly significant sand mixed in with the oil means that there is a ’sand-blast’ effect going on, too, constantly gouging away at the escape site and enlarging it. Not good.

Under the heading “The Politics” (though really it should be “Who’s going to be liable”), he considers who might be in the firing line:

Does BP have culpability because of trying to move too fast? At over $500 a minute, they certainly have the incentive to move fast. We don’t know – yet.

Is Transocean to blame for some sort of negligence in not properly monitoring the mud return or some other aspect of cementing process? We don’t know – yet.

Was Halliburton’s cement job faulty? We don’t know – yet.

Did Cameron International’s BOP fail due to manufacturing or design fault? We don’t know – yet.

Is a combination of one or more of the above? Quite possibly, but we don’t know – yet.

There are unsubstantiated reports that the kick registered over 30,000 psi. If the BOP stack saw that kind of pressure, it could be a important factor, both in determining what happened and how to prevent it from happening again.

I guess these are some of the issues that are going to play out over the coming months and years as people struggle to get to the bottom of the incident and what — and who — caused it.

Not a mention of insurance, though. But then it’s not top of people’s minds. Oh, and there is some perhaps surprising defence of lawyers in the comments to the article. Now that is unusual.

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There’s a great, detailed piece about how the Deepwater Horizon incident unfolded and some pretty precise technical reportage on what has broken and how (though it’s a shame the diagrams aren’t there).

As the author says:

this accident is Mother Nature’s wake-up call to everyone. Deep-water drilling is a high-stakes game. It’s not exactly a “casino,” in that there’s a heck of a lot of settled science,
engineering and technology involved. But we’re sure finding out the hard way what all the risks are. And it’s becoming more and more clear how the totality of risk is a moving target. There’s geologic risk, technical risk, engineering risk, environmental risk, capital risk and market risk.

As part of the wider picture of BP, you might want to look at this piece in the WSJ about the history of cost-cutting under previous CEO, John Browne:

BP has acknowledged criticisms of “systemic lapses” leveled by a Chemical Safety Board report for its past sins. In 2006, the Chemical Safety Board’s report about Texas City warned that BP’s managers, scarred by “a cultural issue,” posed “an imminent hazard” to safety. Then, after the Alaskan oil spills, Congressional investigators heard testimony by a former BP engineer in Alaska complaining, “There is no doubt that cost-cutting and profits have taken precedence over safety and the environment.” He asked rhetorically whether, rather than “Beyond Petroleum,” BP actually stood for “Beyond the Pale.” Mr. Wine says that since Mr. Hayward became CEO, BP has been rolling out a new system for developing and maintaining operating standards across the company, including safety standards, as a response.

But as the article points out, we all need BP to get this one right, not just be proved wrong in the past.

At the time of writing there seems no sign any time soon of the well being capped. Let’s all hope it is, and quickly.

Finally, here’s a roundup from Business Insurance on which carriers look to be affected by the incident. I brief, those with big exposures include ACE, Axis and Lancashire. Others include Hiscox, Partner Re, Validus, Montpelier Re, Transatlantic Re and Hannover Re.

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Barry Ritholtz at the Think Tank has 10 Interesting Points to make about the SEC case against Goldman Sachs.

I especially like:

7. This is a Complex Case: Again, no. Parts of it are a little more sophisticated than others, but this is a simple case of fraud/misrepresentation. The most difficult part of this case is likely to turn on what is a “material omission.” Paulson’s role in selecting mortgages may or may not be material — that is an issue of fact for a jury to determine. But complex? Not even close.

And also the final one:

10. I’m not a lawyer, but . . . Then you should not be ignorantly commenting on securities litigation. Why don’t you pour yourself a tall glass of STF up and go sit quietly in the corner.

The comments are quite good, too.

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Will Lehman be Ernst & Young’s Enron?

That is the question everyone is asking after the publication of investigator Anton Valukas’s report suggesting that Lehman may have used an, um, unusual accounting practice — Repo 105 — to make it look as if its leverage was much lower at each quarter-end that in fact it was. The effect of this was to make it appear financially stronger than it was.

Ernst & Young arguably did not meet professional standards, both in investigating whistleblower allegations about the use of Repo 105 and in connection with the audit and review of Lehman’s financial statements, claims Mr Valukas.

reports the FT, though it also offers the surprising comment that “Accounting experts say the Lehman report will not be “an Enron” for Ernst & Young, in part because, with only four big accounting firms remaining, clients do not have many options to move elsewhere.” Oh, so that’s all right then — no matter what they may have done (if anything — and that is not established at this point), they can’t go down because there aren’t enough other auditors in the world to fill the gap.

Bad signal.

The FT have a reasonable slideshow on Repo 105 here, And there’s a pretty good explanation of the matter here by Simon Watkins of the Mail (of all sources).

Lehmans couldn’t get a US firm to sign off on the legality of the practice, so they took advice from Linklaters, who said it was doable under English law. Linkies’ comment to the New York Times’ DealBook team was standard:

The U.S. examiner’s report into the failure of Lehman Brothers includes references to English Law opinions which Linklaters gave in relation to a number of Lehman transactions. The examiner – who did not contact the firm during his investigations – does not criticise those opinions or say or suggest that they were wrong or improper. We have reviewed the opinions and are not aware of any facts or circumstances which would justify any criticism.

However, what I really love is the Lehman’s internal e-mail exchange quoted at the end of the NYT piece:

* “It’s basically window-dressing.”

* “I see … so it’s legally do-able but doesn’t look good when we actually do it? Does the rest of the street do it? Also is that why we have so much BS [balance sheet] to Rates Europe?”

* “Yes, No and yes. :)”

So, it seems to be a one-off practice to Lehman (see answer 2 above). I think E&Y are in trouble on this one.

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Eric Sprott has an excellent paper on the financial crisis and how we collectively appear to have learned nothing from it.

So where does this leave us for the decade ahead? In bad fiscal shape. It seems as if we’re just making the same mistakes over again, and on a far larger scale. We have passed the debt obligations of the financial system onto the governments. We have liquefied the system beyond any rational explanation, more than doubling the monetary base since the collapse of Lehman Brothers. Social Security, which was in balance in year 2000, is now underfunded by $15 trillion dollars. Total unfunded obligations of the US Government are now $104 trillion. If we add the $6 trillion of outstanding Fannie Mae and Freddie Mac debt and the $12 trillion of outstanding national debt, we arrive at a total US government debt obligation of $122 trillion. It’s a truly preposterous amount of money that will never be paid off in today’s dollars. As we wrote in our October 2009 article entitled “Dead Government Walking”, the US Government is on a trajectory to default on their obligations, and the same can realistically be said for the UK and Japan. The answer put forward by the US, UK and Japanese governments? Quantitative Easing and 0% interest rates. Have they learned nothing from the past decade?!

Indeed.
More thinking needed.

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Provocative but not wholly unpersuasive slant from zerohedge.Com, who say that Obama is, in true Roman fashion, distracting the people with bread and circuses (well, at least circuses) from the main story:

“For those who care where the real news is, we direct your attention to today’s Daily Treasury Statement, which disclosed that total US debt just jumped to $12.817 trillion, $51 billion higher on the day, $101 billion higher for the month of April, and $965 billion higher for the fiscal year beginning October 1, 2009 (so six months ago).”

The figures are staggering. Which is what makes one sit up and think, Hmmm, not so far-fetched, perhaps.

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Senator Ted Kaufman Comments On Goldman SEC Charge:

“‘To restore the public’s faith in our financial markets and the rule of law, we must identify, prosecute, and punish with stiff fines or prison those who broke the law. Their fraudulent conduct has severely damaged our economy, caused devastating and sustained harm to countless hard-working Americans, and contributed to the widespread view that Wall Street does not play by the same rules as Main Street.’”

Via zero hedge, whose coverage on the Goldmans issue is extensive and interesting.

And according to the Huffington Post this may be only the first of many such actions:

…in going after Goldman Sachs, the SEC is sending a message, Tavakoli [a Chicago-based derivatives expert and founder of Tavakoli Structured Finance] said. Firms like JPMorgan Chase are reserving more of their cash for an expected onslaught of lawsuits, according to regulatory filings. JPMorgan set aside an additional $2.3 billion for “increased litigation reserves, including those for mortgage-related matters,” according to its first quarter filings released this week.

For, um, balance, here is Goldman’s response, just out. Basically, “we lost money too and everyone knew the risks“. [Note the interesting comments to the post, too].

Watch this space.

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Public bodies, private businesses and even some individuals now create, exchange and store data and communicate with each other almost entirely by electronic means. The volume of such Electronically Stored Information (ESI), even in small organisations, is immense because of the sheer ease of creation, transfer and storage.

The problem with ESI in litigation

The problem with this in litigation is that it can be difficult if not impossible for a party to gauge the scope of a “reasonable search” for ESI under CPR Rule 31.7 and PD31(2), both in relation to its own disclosure and that of its opponents.

In Goodale & Ors v The Ministry of Justice & Ors [2009] EWHC B41 (QB) Senior Master Whitaker, Chairman of the working party which drafted the new practice direction on ESI, has given timely and highly practical advice on how the parties and the court are to determine the scope of the search for ESI, how to make it proportionate and how to do it correctly first time, without the court having to order it to be done again at great expense.

Context and issues

The case concerns a group-action in which Opiate Dependent Prisoners seek redress from the government over the latter’s policy of ‘one size fits all’ detoxification procedures. Many prisoners complain of suffering and one is alleged to have died as a result of the policy.

The issue here was whether the Ministry of Justice, as defendants, should have to make any disclosure of ESI. They had refused to do so, despite having agreed to disclose their paper documents. This in itself made the case unusual, since the customary debate is over the extent of what is reasonable in the search, not whether the search should be conducted at all. The Master found that standard disclosure should be ordered (as will happen in the majority of cases) and hence that the defendants must conduct a reasonable search for all documents, including those in ESI.

Dealing with the practicalities

Here is the meat of the judgment. Since the defendants had provided almost no information about their ESI, no one could say with any certainty what was available, where it was, nor how much it would cost to search it, let alone how relevant any of it was. The defendants proposed that the parties and the court consider the paper disclosure and then, at some later stage, decide what more might be needed by way of ESI disclosure.

The Court rejected this. It emphasised that the extent of the search was not simply to be open-ended and that it is for the Court to control the exercise to make it proportionate to the issues at stake.

At the moment we are just staring into open space as to what the volume of the documents produced by a search is going to be. I suspect that in the long run this crude search will not throw up more than a few hundred thousand documents. (Para 27)

1. First, start with the key people ‘at the top of the pyramid’ and use a staged, incremental approach. Often, that may suffice since the key documents are likely to be in the ESI owned by these most important players.
2. Second, consider ‘key word’ searches (to be agreed) against some or all of those key players’ ESI stores. This is a relatively crude method, but it will give some indication of what might be uncovered and how much there is of it.
3. Third, with a rough idea from the keyword searches of the volumes involved, use specialists and specialist software to fine-tune the results and de-duplicate.
4. Then, fourth, you move to reviewing with real people.

The ESI Questionnaire

Importantly, the judgment annexes to it the new proposed ESI Questionnaire. This is now a publicly available document (it is unlikely to become a Practice Direction until later this year) and hence it is likely that parties will be encouraged to adopt it as best practice.

The Questionnaire is not intended as a formulaic, tick-box list adding another layer of costly bureaucracy onto the litigation process. Rather, it is a helpful guide to issues which might arise and of which only some may be relevant to a given case. Indeed, the Court’s first step will be to decide whether the case warrants using the Questionnaire at all, and if it does it may decide on a modified version of it. This should then make everyone focus, at an early stage, on what is actually helpful for the case in question. The judgment itself is an excellent example of how active case management by an involved judge can adapt the Questionnaire to the circumstances.

In summary

This is a short, succinct judgment which explains not just the steps involved but stresses the need for all parties to focus on why the ESI disclosure is necessary. The goal is not to add burdens (and costs) to cases which do not merit them, nor to force disclosure for its own sake.

But equally the judgment shows that the courts will not accept that there should be no or limited disclosure merely on the grounds that it will be expensive or inconvenient for the party concerned to provide it.

While the less technically and less technologically minded judges may have struggled with some aspects of ESI disclosure, this judgment, backed up the ESI Questionnaire, provides a clear and understandable roadmap for them, as well as for lawyers, executives and claims managers. Welcome to the future of disclosure.

As I’ve had a number of requests for a copy of it, here is the ESI Questionnaire in PDF format, taken straight from the appendix to the judgment.

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ADR (Alternative Dispute Resolution) is something that the English Courts tend to encourage in the process of litigation. Normally, at least in the Commercial Court, the parties will be required to confirm by the time of the Case Management Conference what steps they have taken to resolve the matter by way of ADR.

In the case of Fitzroy Robinson -v- Mentmore Towers [2009] EWHC 1552 (TCC), Coulson J highlighted two reasons why this can be a Good Thing.

First, he pointed to the expected narrowing of issues that ADR would most probably have brought about:

In its absence, the parties adopted diametrically opposed positions in the run-up to the trial. The distance between them only began to lessen at the start of the the trial itself. The best example of this concerned the Defendants’ case for rectification… Once the real issue became apparent, the Defendants effectively abandoned their rectification claim at the start of the trial, and sought instead to argue that, on the true construction of the Contracts, FRL were not entitled to the monthly instalments without adjustment. That argument was not only a better and more realistic submission in all the circumstances, but it should and would have become apparent to the Defendants much earlier if the parties had undertaken ADR [my emphasis].

Secondly, he pointed to the black and white allegations of dishonesty in the case, about which there was no room for havering or ambiguity — either the Claimant was lying or the Defendant was.

The nature of the allegations involving Mr Blake and Mr Thompson leaves no room for ‘fudge’; in relation to a number of the key elements of the story, everyone agrees that one or other man must not be telling the truth. It seems a pity that the parties were not able even to attempt to resolve their differences by way of ADR, so as to avoid my findings on these issues being made in a public Judgment [again, my emphasis].

In other words, ADR might well have avoided some rather disagreeable, and damaging, washing of dirty laundry in public.

So the next time you have to address the question of ADR, take 30 minutes or so think about the circumstances of the case and all the ramifications around it and see whether ADR might be more than a mere formality to be ticked off as ‘considered and not appropriate in the circumstances’ on the CMC check-sheet.

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